Collusive Monopsony in Theory and Practice: The NCAA
| Published date | 01 September 1997 |
| Date | 01 September 1997 |
| DOI | http://doi.org/10.1177/0003603X9704200307 |
| Subject Matter | Symposium: Antitrust in the Sports Industry |
The Antitrust Bulletin/Fall 1997
Collusive
monopsony
in
theory
and practice: the NCAA
BY ROGER D. BLAIR* and RICHARD E. ROMANO**
I. Introduction
681
"Monopsony" is the inelegant label attached to the structural con-
dition in which there is a single buyer of a good or service.' In the
United
States,
this market structure is no more
common
than
structural monopoly, which is rare indeed. But
collusive
monop-
sony is not so rare. Examples can be found throughout the econ-
omy.
For
example,
buyer
cartels have been found among antique
*
**
Huber Hurst Professor, University of Florida.
Gunter Professor
of
Economics, University of Florida.
AUTHORS' NOTE: The authors appreciate the financial support
of
the Col-
lege
of
Business Administration at the University
of
Florida. The discus-
sion
of
our ideas with conference participants also proved quite helpful.
For a thorough treatment of the antitrust law and economics of
monopsony, see
ROGER
D.
BLAIR
&
JEFFREY
L.
HARRISON,
MONOPSONY
(1993).
©1997 by Federal Legal Publications. Inc.
682
The antitrust bulletin
dealers.s sugar refiners.' and bidders on timber rights.s real estate.>
and
used
commercial
equiprnent.s
There
are
examples
in
the
sports industry as well.
For
instance, the owners
of
major league
baseball
teams were found guilty
of
collusion in the free agent
market.7In the sports arena,
our
focus is on the National Colle-
giate
Athletic Association (NCAA) as a collusive monopsony."
The
NCAA's members collude on two key inputs in the pro-
duction of athletic competition: the athletes themselves and their
coaches. With respect to athletes, the agreement restricts quanti-
ties by placing aceiling on the
number
of
scholarships. In addi-
tion,
in
the
name
of
amateurism,"
the
compensation
of
these
athletes is limited to room, board, tuition, books, and incidentals.
Bonuses
for winning conference championships are limited to rel-
atively inexpensive rings or watches. With respect to coaches, the
number
employed
in each sport is
limited
by
NCAA
Bylaw. In
this connection, we examine the Hennessey v. NCAA litigation.!?
The
compensation
of
coaches is typically unconstrained, although
Meg
Cox,
At
Many Auctions, Illegal Bidding Thrives as a Long
Time Practice Among Dealers,
WALL
ST. J.,
Feb.
19, 1988, at 23,
col.
1.
Mandeville
Island
Farms
v.
American
Crystal
Sugar
Company,
334
U.S.
835
(1947).
4
United
States
v. Portae, Inc., 869 F. 2d 1288
(9th
Cir. 1989).
Cox, supra note 2.
United
States
v.
Perfection
Machine
Sales, Inc.,
Criminal
No. 88-
00281
(E.D.Pa.,July
18, 1988).
See
BLAIR
&
HARRISON,
supra
note
1, at
10-11.
A
more
extensive
and
somewhat
different
treatment
is
provided
by
ARTHUR
A.
FLEISHER,
III,
BRIAN
GOFF
&
ROBERT
D.
TOLLISON,
THE
NATIONAL
COLLEGIATE
ATHLETIC
ASSOCIATION:
A
STUDY
IN
CARTEL
BEHAV-
IOR
(1992).
9
"Everyone"
knows
that
the
ideal
of
amateurism
is a
sham.
See,
e.g.,
William
C.
Rhoden,
A Charade Continues in Front
of
Thousands,
N.Y.
TIMES,
Aug.
26, 1996, at B5, col. 3.
10
Hennessey
v. National
Collegiate
Athletic
Association,
564
F. 2d
1136
(5th Cir. 1977).
Collusive monopsony :683
there have been attempts to restrict the earnings
of
some coaches.
In
this
connection,
we
examine
the
Law
v.
NCAA
litigation.!'
which led the NCAA to rescind its rule restricting the earnings
of
some assistant coaches.
In
this
article,
we
present
a
positive
theory
of
collusive
monopsony. In doing so, we
examine
the problems inherent in
organizing acartel, coordinating the efforts of the members, and
enforcing the terms
of
agreement. We also explore the implica-
tions
of
collusive monopsony for price and quantity as well as the
returns to the colluders.
In
this regard, we show the effect of col-
lusive
monopsony
on average and marginal
cost
as well as on
profit. We extend the standard analysis to the case involving qual-
ity variation in the purchased input. Finally, we examine the wel-
fare consequences and the implications for antitrust policy.
II. The incentive to collude
When
buyers behave independently the forces of supply and
demand will typically lead to a price and quantity that maximizes
social welfare.'? Figure Ishows the market for good or service L,
which will be an input to production in our application. The inde-
pendent decisions of buyers and sellers
of
L will lead to a price
of
WI
and a quantity
of
LI•Now, consumer surplus is the difference
between the most that buyers are willing to pay for the good or
service and what the market requires them to
pay."
Analogously,
producer (or supplier) surplus represents the difference between
the lowest price that suppliers are willing to accept and the actual
market price.14 Social welfare is the sum of supplier surplus (area
11
Law
v. National Collegiate Athletic Association, 902 F. Supp.
1394 (1995).
12
Here
we presume the
market
is otherwise
competitive
and the
transacted good or service is associated with no externalities that might
lead to market failure. On market failure, see F. M. Bator, The Anatomy
of
Market Failure, 72 Q. J.
ECON.
351 (1958).
13 See, e.g.,
HAL
VARIAN,
INTERMEDIATE
MICROECONOMICS
258-60
(1987).
14 [d. at 262-63.
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